Conditional Control: The Consequences of Expanding Creditors’ Right to Initiate Bankruptcy

Conditional Control: The Consequences of Expanding Creditors’ Right to Initiate Bankruptcy

Assaf Hamdani, Yevgeny Mugerman, Ruth Rooz, Nadav Steinberg, Yishay Yafeh

Series number :

Serial Number: 
811/2022

Date posted :

January 12 2022

Last revised :

January 12 2022
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Keywords

  • creditor rights • 
  • financial distress • 
  • Bankruptcy • 
  • Aggressive Accounting • 
  • Informativeness

We study the effects of a court decision granting creditors the power to force into bankruptcy corporate debtors whose liabilities exceed their assets even if they are current on their payments.

We find that bond (stock) prices responded positively (negatively) to the court ruling and that firms affected by it did not reduce their risk, but increased their net worth through equity injections and aggressive accounting. As a result, the informativeness of these firms’ financial reports decreased. We conclude that the benefits from some measures of creditor empowerment may be mitigated by borrowers’ incentives to present overly-optimistic financial reports.

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Authors

Real name:
Yevgeny Mugerman
Real name:
Ruth Rooz
Real name:
Nadav Steinberg
Professor
Real name:
Yishay Yafeh
Research Member
School of Business Administration, the Hebrew University of Jerusalem